Fragile global supply chains are under further pressure from the delta variant of coronavirus. As it spreads, it results in more port closures, factory shutdowns, production halts and labour shortages.
Until the spread of delta eases, these disruptions will almost certainly delay the return of full production in the global economy until the middle of next year. We’ll also see prime conditions for further price volatility.
Middle market firms should prepare for these disruptions as they build inventories ahead of the critical holiday season. Finding alternative domestic suppliers and adopting dynamic pricing strategies could be the best approaches for firms contending with rising prices and changes in supply and demand.
All roads lead to Rome, but at a higher cost
The mismatch of supply and demand is not permanent. It’s more likely to be similar to last year’s experience, early in the pandemic, when businesses and consumers faced volatile food prices and shortages of everything from pasta to toilet paper.
In the near term, though, there is no getting around the constraints in the supply chain. Middle market companies that rely on imports must prepare for two major issues that will last well into 2022; rising international transportation costs, and depleted inventories.
Container shipping costs to Europe from every part of the world, especially Asia, have risen. The cost of shipping a container from Asia, the world’s factory floor, to Europe has risen four-fold since this time last year. And other major shipping routes have seen similar price rises.
There are two main reasons for this surge in shipping costs:
- First, lockdowns in the developed world shifted consumer demand from services to goods, many of which needed to be imported.
- Secondly, at the same time, supplies were restricted when lockdowns in Asia closed some of the world’s busiest ports. At the height of the pandemic, in early 2020, the volume of containers travelling from Asia to Europe and North America halved.
Admittedly, the volume of containers travelling across the ocean recovered quickly. Shipping volumes from Asia to Europe have returned to pre-pandemic levels and volumes from Asia to North America are 10% higher. But it will still take time for the backlog of orders to make its way across the high seas.
There are two issues further complicating shipping logistics:
First, companies are restocking supplies depleted during the pandemic. The stocks of purchases balance of the UK manufacturing PMI has been above 50 since May, indicating that firms have been adding to their stocks of raw materials.
Given the experience over the last year, in future firms are likely to want to hold more inventories so they can meet any level of demand. There are many anecdotal reports of firms moving from a ‘just in time’ model of inventory management to a ‘just in case’. This will raise demand for goods and shipping in the short term, but shouldn’t lead to a sustained increase in demand.
Second, once goods have landed there are delays in getting them out of ports. The number of UK firms saying they have had difficulty importing goods due to a lack of hauliers has risen from 14% in February to 22% in October.
This is a common problem in the US, the UK, Europe and Asia. Bloomberg reports that backlogs at ports around Hong Kong and Shenzhen are the largest recorded there since April.
The disruptions will not be permanent. Consumer spending patterns will return to normal, firms will be able to adequately restock, and capacity in shipping and ports will increase. But this won’t be a quick process.
Global supply chains are unlikely to return to normal until the middle of next year, perhaps even later if there are further coronavirus or weather-related problems. Upward pressure on inflation and firms’ costs will continue over the next six months, so middle market companies should look for alternative solutions to manage that and to take advantage of strong spending on goods.
With international shipping costs so high, one natural solution is to look for alternative domestic suppliers that are now better placed to compete on pricing.
The other solution is to adopt dynamic pricing strategies that give companies the best tools to change prices quickly in response to changing supply and demand. It’s therefore critical to invest in relevant technologies and human capital so as to optimize automation and data analytics. A number of big tech companies have already proven that flexible pricing can be very profitable if used properly.